Strategies for diversifying investments
By Michael A. Poland, CFA^®, MBA

A year like 2008 is enough to make anyone question what they think they knew about investing and the stock market. The “buy and hold” philosophy is certainly being questioned as a valid strategy, especially in uncertain economic climates like the one in which we currently find ourselves. So what is an investor to do in an attempt to “bullet-proof” their portfolio?  Several areas are gaining popularity and are worth consideration.

Bonds

Individual corporate bonds offer attractive return potential with less historical risk than equities.  We only recommend highly-rated bonds in a laddered portfolio with a maximum maturity of five years.  A “laddered” bond portfolio is staggered among bonds with different maturities, in order to receive regular income and to hedge or smooth-out the effect of interest rate fluctuations. “Owning the maturity” protects your principal should interest rates begin to rise. Two years ago, owning longer maturities was a comfortable approach. However, with the government on a spending binge and inflation a very real possibility, keeping maturities a bit shorter is a more desirable at this time.

Annuities

Many investors also utilize annuities for a part of their portfolio. We recommend annuities for their “guaranteed-income riders.” Essentially, you can lock in an income level based upon a guaranteed growth rate on your current assets. The idea is to have your underlying assets invested in a diversified portfolio, while retaining a “guaranteed” rate of return should the markets falter. These riders come with a fee, though, which could have a drag effect on your overall return. If this option appeals to you, we recommend that you only deal with a well-known and highly-rated insurance company. However, the climate is starting to change right now as insurance companies are reducing benefits in order to firm up their own balance sheets.

Alternative Asset Classes

Alternative asset classes began receiving more attention from individual investors than they did several years ago. The object here is to invest in assets that have little or no correlation to traditional stock market investments. Commodities, for example, proved to be a great place to be in 2008, delivering double-digit returns during the worst year for the stock market in recent memory. Put another way, commodities zigged when the market zagged – and that is what you are looking for with alternative assets. 

Gold is another alternative asset bearing low correlation to the equity markets. In fact, gold was an excellent place to be during the correction of 2002. With any “alternative investment” there is no guarantee that you will “bullet-proof” your investment however. Even though it was up in 2002, gold was down in 2008 along with the equity markets. As with more traditional investments, a sound tenant is to diversify your alternative asset holdings as much as you would diversify more traditional stock and bond holdings. Other “alternatives” are bear-market funds, long-short funds, natural resources, real estate and metals such as silver or copper.

Active Asset Allocation

Finally, a strategy that many are employing is “active allocation.” This strategy works in direct contrast to the traditional “buy and hold for the long-term” plan. Essentially, active allocation is a process for evaluating the underlying currents of the economy and the markets to identify upward or downward trends. When the equity markets are looking stronger, you would like to be more active in investing in it. As weakness begins to develop, you would like to reign in capital (move more to cash). 

A discussion of bullet-proofing your portfolio would not be complete without mentioning cash.  One could go to cash with all or a portion of their assets to avoid market volatility. The penalty for cash is the current low interest rate environment and the potential of missing market upswings. As of this writing, the S&P 500 is going through a slight correction but is still up over 25 percent from the market low.

Of course all of the above strategies carry their own elements of risk. Which strategy (or combination of strategies) is right for you? A discussion with your advisor which considers your unique objectives, risk tolerance and time horizon is the first place to start.

Advisory services offered through Rehmann Financial, an SEC Registered Investment Advisor.  Securities offered through Triad Advisors, Member FINRA/SIPC.

This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined.

Mike Poland is a Portfolio Manager and Financial Advisor with Rehmann Financial, a subsidiary of Rehmann. He carries the Chartered Financial Analyst^® designation and is located in the Muskegon office. Contact Mike at 231.759.5031 or by emailing michael.poland@rehmann.com.